nep-pbe New Economics Papers
on Public Economics
Issue of 2015‒06‒20
eighteen papers chosen by
Thomas Andrén

  1. Flat Tax, the solution? By Flamino Viola; Margarida Saraiva
  2. A Better Local Business Tax: The BVT By Richard M. Bird
  3. Corporate tax in an international environment - Problems and possible remedies By Seppo Kari
  4. Can GTA Municipalities Raise Property Taxes? An Analysis of Tax Competition and Revenue Hills By Almos Tassonyi, Richard M. Bird, and Enid Slack
  5. Are income taxes destined to rise? the fiscal imbalance and future tax policy By Saving, Jason L.; Viard, Alan D.
  6. Shaming Tax Delinquents: Theory and Evidence from a Field Experiment in the United States By Ricardo Perez-Truglia; Ugo Troiano
  7. Declining female labor supply elasticities in the U.S. and implications for tax policy: evidence from panel data By Kumar, Anil; Liang, Che-Yung
  8. Time-Inconsistency and Saving: Experimental Evidence from Low-Income Tax Filers By Damon Jones; Aprajit Mahajan
  9. Groupings and the Gains from Tagging By Ravi Kanbur; Matti Tuomala
  10. The Political Economy of Social Security Funding: Why Social VAT Reform? By Hideki Konishi
  11. The Impact of Double Tax Treaties on Foreign Direct Investments: Evidence from Turkey’s Outward FDIs By Sava Çevik; Mehmet Okan Ta
  12. Optimal indirect taxation and the uniformity debate: A review of theoretical results and empirical contributions By Odd E. Nygård; John T. Revesz
  13. How can the labor market accounts for the effectiveness of fiscal policy over the business cycle? By Thierry BETTI; Thomas COUDERT
  14. The Effect of Moving to a Territorial Tax System on Profit Repatriation: Evidence from Japan By Makoto Hasegawa; Kozo Kiyota
  15. The Right Type of Legislator: A Theory of Taxation and Representation By Mattozzi, Andrea; Snowberg, Erik
  16. Productivity and performance in the public sector. By Mathieu Lefebvre; Sergio Perelman; Pierre Pestieau
  17. A New Look at the U.S. Foreclosure Crisis: Panel Data Evidence of Prime and Subprime Borrowers from 1997 to 2012 By Fernando Ferreira; Joseph Gyourko
  18. Discounting Pension Liabilities: Funding versus Value By Jeffrey R. Brown; George G. Pennacchi

  1. By: Flamino Viola (CEFAGE e Universidade de Évora); Margarida Saraiva (CEFAGE e Universidade de Évora)
    Abstract: This article presents a comparative study of the tax burden of the Portuguese tax system, with the application of progressive rates and proportional rates (flat tax) in determining personal income tax. For this work we chose case study methodology, specifically comparative case study methodology, because it is understood to be the one best suited to the complexity of the subject under review. The results demonstrate that flat tax respects the constitutional principle of progressive tax rates; Portuguese taxpayers with lower (higher) incomes pay less (more) taxes on personal income compared to the flat tax; that the existence of progressive rates does not mean Portuguese taxpayers benefit; and that the flat tax can achieve higher tax revenue than the IRS (Individual Income Tax) in force. Although adoption of the flat tax is possible, it is not believed this adoption would be feasible for political reasons.
    Keywords: Individual income tax; Flat tax; Progressive tax; Proportional tax; Portuguese fiscal economy.
    JEL: H24
    Date: 2015
  2. By: Richard M. Bird (University of Toronto)
    Abstract: This paper makes the case for a new tax for local government: the Business Value Tax (BVT). The BVT is a value added tax (VAT) like the Canadian federal Goods and Services Tax (GST) and the Harmonized Sales Tax (HST) used in some provinces, but it taxes business income rather than sales. The author concludes that a local BVT is economically preferable to other forms of local business tax, administratively manageable, and could be politically desirable – especially for large cities and metropolitan regions with urban infrastructure investment needs. It outlines how the tax works, shows how it differs from the GST/ HST, and discusses the experience with BVT-like taxes in several countries.
    Keywords: tax, business value tax, large cities
    JEL: H11 H72
    Date: 2014–09
  3. By: Seppo Kari
    Abstract: This paper addresses the problems of corporate taxation in a globalized world. It first illustrates recent trends in international practices and then reviews the literature on the effects of corporate taxes in closed and open economies. The paper emphasizes the severity of the problems caused by current international tax rules. It compares various national and international policy proposals and considers two recent Nordic tax reform proposals as examples of national-level solutions. The problems of current international corporate taxation are fundamental. Introducing increasingly tight anti-avoidance measures could serve as a medium term approach but does not provide any promising long-term solution. There should be more research concerning initiatives that would reform the fundamental principles of the international tax system.
    Keywords: corporation tax, international taxation, multinational firms, tax avoidance
    JEL: H87 H32 F23 H25
    Date: 2015–03–17
  4. By: Almos Tassonyi, Richard M. Bird, and Enid Slack (University of Toronto)
    Abstract: This paper applies an empirical lens to this controversial question. Cities in the GTA and across Canada are reluctant to raise property taxes, both because the public resists paying higher taxes, and because cities are concerned that property owners will move to jurisdictions with lower tax burdens. The authors find that overall there is room for most municipalities in the GTA to increase property taxes without, in most cases, lowering the tax base.
    Keywords: property taxes, municipalities, tax competition, revenue hills, Toronto, Canada
    JEL: H11 H72
    Date: 2015–05
  5. By: Saving, Jason L. (Federal Reserve Bank of Dallas); Viard, Alan D. (American Enterprise Institute)
    Abstract: We present a model of optimizing government behavior in which a need for increased revenue leads to the introduction of a new revenue source, such as a VAT, accompanied by a reduction in income taxes. We argue that this is a plausible outcome for the United States, in view of international experience and recent fiscal reform proposals, and has important implications for individual investment decisions.
    Date: 2015–01–01
  6. By: Ricardo Perez-Truglia; Ugo Troiano
    Abstract: We study shaming as a policy to improve tax debt collection. First, we show that when the tax agency focuses on private welfare and revenues, the optimal policy may involve a mix of financial and shaming penalties. Second, we present evidence from a field experiment with 34,344 tax delinquents who owed half a billion dollars in three U.S. states. We find that increasing the salience of financial and shaming penalties reduces tax delinquency. We also provide suggestive evidence that the effectiveness of these penalties depends on the garnishability of the debtor's income as in the model.
    JEL: H26 H63 K42
    Date: 2015–06
  7. By: Kumar, Anil (Federal Reserve Bank of Dallas); Liang, Che-Yung (Uppsala University)
    Abstract: Recent work has provided compelling evidence of a long-term decline in US female labor supply elasticities with respect to wages and to income. While previous work used cross-sectional data from the Current Population Survey (CPS), we reexamine the trend for married women using panel data from the Panel Study of Income Dynamics (PSID) from 1980 to 2006. We find evidence in support of a long-term decline in married females’ labor supply elasticities on the participation margin, but less so on the hours margin. We also extend the analysis to investigating the implications of these results on welfare effects of tax reforms. Policy simulations indicate that shrinking elasticities, mostly concentrated on the participation margin, have contributed to a dramatic decline in welfare gains from actual and potential tax reforms since the 1980’s.
    Keywords: Female labor supply; Taxes and labor supply
    JEL: H21 H24 H31 J22
    Date: 2015–01–01
  8. By: Damon Jones; Aprajit Mahajan
    Abstract: We conduct a field experiment designed to test theories of time-inconsistency, namely a "Beta-Delta" model of present bias. The experiment takes place in the context of a saving decision made by low-income tax filers who can deposit their income tax refund into an illiquid account. We find qualitative evidence consistent with present-biased preferences. The tradeoff between an earlier payment or a later one is much more skewed toward taking the early payment when the decision is made on the spot than when the decision is made in advance. We estimate a β and δ of 0.34 and 1.08 over an 8-month horizon, respectively, which translates into an annual discount rate of 164%.
    JEL: D14 D91 H24
    Date: 2015–06
  9. By: Ravi Kanbur; Matti Tuomala (School of Management, University of Tampere)
    Abstract: The large literature on “tagging” shows that group specific tax and transfer schedules improve welfare over the case where the government is restricted to a single schedule over the whole population. The central assumption, however, is that the groupings available to the government are given and fixed. But how many and which types of groups should the government choose to tag? This is the question addressed in this paper. Starting with a simple framework and ending with numerical simulations based on data from Finland, we show how groupings should be formed for tagging, and provide a quantitative assessment of how group differences affect the gains from tagging, and of the marginal welfare gains from increasing the number of groups being tagged. We hope that these results are the first steps in a richer analysis of tagging which expands the question of design to the arena of choice over groups being tagged.
    Date: 2014–02
  10. By: Hideki Konishi (School of Political Science and Economics, Waseda University)
    Abstract: Recently, taxation reforms entailing a “social” valued-added tax (VAT), i.e., a social security reform shifting funding from traditional wage-based taxation to consumption taxation, have been obtaining political support in some developed countries; e.g. Japan, France, Denmark, and Germany. This paper analyzes the political economy of social security funding in an overlapping-generations economy. In particular, we consider how population aging influences the choice of wage or consumption tax financing by focusing on their differential impact on inter- and intragenerational redistribution. Our results show that population aging may drastically alter the political equilibrium, in that if the population growth rate is higher than the interest rate, wage taxation is the only equilibrium choice, but if it is lower, multiple equilibria are likely to emerge, in which the introduction of consumption taxation emerges as an alternative equilibrium choice.
    Keywords: political economy of social security, consumption tax, structure-induced equilibrium
    JEL: D78 H55
    Date: 2014–04
  11. By: Sava Çevik (Selcuk University, Faculty of Economics and Administrative Sciences, Department of Economics); Mehmet Okan Ta (Selcuk University, Faculty of Economics and Administrative Sciences, Department of Economics)
    Abstract: Double tax treaties (DTT) are mainly signed to overcome the problem of international double taxation and to coordinate national tax systems in bilateral or multilateral economic interactions. However, one more reason to engage in DTTs is to facilitate international economic flows for capital especially and to attract foreign capital. To increase foreign direct investment (FDI) is a desirable policy goal for both developing and developed countries. In order to examine whether DDTs have significant impact on FDIs, this paper analyzes Turkey’s outward FDI stocks to 71 host countries over the period of 2001-2012. In analyses, we use Turkey’s FDI stock toward the host countries as dependent variable. In addition a number of control variables, we analyze the impact of a dummy of presence of DTTs and the age of treaty. As the estimation technique, we mainly use fixed effect estimators and regressions with panel-corrected standard errors (PCSE) to handle heteroskedasticity and autocorrelation, in addition to some other specifications for robustness aims. After controlling for various determinants of bilateral FDI stocks, the study’s results show that DTTs are indeed positively associated with foreign investment toward the host country from Turkey. This finding supports policy considerations on the impact of DTTs on FDIs. The results hold for various of specifications.
    Keywords: double tax treaties, foreign direct investments, international double taxation
    JEL: H87 F21 H25
  12. By: Odd E. Nygård; John T. Revesz (Statistics Norway)
    Abstract: A review of the theoretical literature on optimal indirect taxation reveals that analytical arguments in favor of uniform indirect taxation seem weak and rather unrealistic; hence determining the optimal tax structure remains an empirical issue. However, reviewing the empirical contributions shows that most of them operate under rather restrictive and simplistic frameworks. The empirical support for uniformity seems weak, particularly when the models approach real world complexity. It appears that within a many-consumer economy, differentiated and progressive indirect taxation is likely to be the optimal solution.
    Keywords: optimal taxation; indirect taxation
    JEL: D3 D6 H2
    Date: 2015–05
  13. By: Thierry BETTI; Thomas COUDERT (LaRGE Research Center, Université de Strasbourg)
    Abstract: We develop a new-Keynesian model with a two-sector search and matching labor market framework. We investigate the first and second order effects of fiscal policy on labor market and on output. The model includes four fiscal instruments: a labor income tax, a social protection tax paid by firms, public wage and public vacancies. First-order simulations of the model indicate that whatever instrument is used, fiscal expansion significantly increases total employment and reduce unemployment. We explicit the different transmission channels at work. The main contribution is to use a second-order approximation of the model to investigate the effects of fiscal shocks for two states of the economy: a low unemployment state (6%) and a high unemployment state (12%). For the four fiscal instruments, response of employment is greater when the steady-state unemployment rate is high. We also emphasize a new channel for explaining a larger output fiscal multiplier in periods of economic downturn: the wage channel that plays a crucial role for explaining the non-linear effects of fiscal policy.
    Keywords: Labor Market Search, Wage Bargaining, Public Wage, Business Cycle, Fiscal Policy, Second Order.
    JEL: E62 J38
    Date: 2015
  14. By: Makoto Hasegawa (GRIPS); Kozo Kiyota (Keio Economic Observatory, Keio University and RIETI)
    Abstract: In an increasingly globalized world, the design of international tax systems in terms of taxation on foreign corporate incomes has received much attention from policymakers and economists alike. In the past, Japan's worldwide tax system taxed foreign source income upon repatriation. However, to stimulate dividend repatriations from Japanese-owned foreign affiliates, Japan introduced a foreign dividend exemption in 2009 that exempts dividends remitted by Japanese-owned foreign aaffiliates to their parent firms from home taxation. This paper examines the effect of this dividend exemption on profit repatriations by Japanese multinationals. We find that the response of Japanese-owned affiliates to the dividend exemption was heterogeneous. More particularly, foreign affiliates with a large stock of retained earnings were generally more responsive to the reform and signicantly increased dividend payments to their parent firms in response to the enactment of the dividend exemption system. Dividend payments by these affiliates also became more sensitive to withholding tax rates on dividends levied by host countries under the new exemption system.
    Date: 2015–06
  15. By: Mattozzi, Andrea; Snowberg, Erik
    Abstract: Theories of taxation conclude that legislators' ability to target redistribution to their districts’ results in higher government spending and taxation. Yet, despite the fact that securing “pork” is an important part of a legislator's job in the U.S., but not in European countries, the U.S. has lower taxes. Our analysis adds a simple assumption to standard models to reconcile them with this fact. Our assumption - that those who are successful in the private sector will also tend to be successful in negotiating transfers for their district - allows our theory to match stylized facts about class representation in legislatures. The model can then be used to examine policies aimed at increasing descriptive representation in legislatures. We find that many of these policies have no, or negative, effects on descriptive representation, including: increasing the number of representatives, allowing parties to choose candidates, or giving parties some ability to discipline legislator's votes and screen candidates. On the other hand, two policies are found to be particularly effective for increasing descriptive representation: proportional representation and limiting competition between legislators.
    Keywords: Political Economy, Citizen Candidates, Taxation, Redistribution, Representation, Legislatures
    JEL: D02 D63 D72 D78 H10 H23
    Date: 2015
  16. By: Mathieu Lefebvre; Sergio Perelman; Pierre Pestieau
    Abstract: In times of budgetary difficulties it is not surprising to see public sector performance questioned. What is surprising is that what is meant by performance, and how it is measured, does not seem to matter to either the critics or the advocates of the public sector. The purpose of this paper is to suggest a definition, and a way to measure the performance of the public sector or rather of its main components. Our approach is explicitly rooted in the principles of welfare and production economics. We will proceed in two stages. First of all we present what we call the "performance approach" to the public sector. This concept rests on the principal-agent relation that links a principal, i.e., the public authority, and an agent, i.e., the person in charge of the public sector unit, and on the definition of performance as the extent to which the agent fulfils the objectives assigned to him by the principal. The performance is then measured by using the notion of productive efficiency and the "best practice" frontier technique. We then move to the issue of measuring the performance of some canonical components of the public sector (railways transportation, waste collection, secondary education and health care). We survey some typical studies of efficiency and emphasize the important idea of disentangling conceptual and data problems. This raises the important question that given the available data, does it make sense to assess and measure the performance of such public sector activities? In the second stage we try to assess the performance of the overall public sector. We argue that for such a level of aggregation one should restrict the performance analysis to the outcomes and not relate it to the resources involved. As an illustration we then turn to an evaluation of the performance of the European welfare states using the DEA approach.
    Keywords: performance measure, best practice frontier, social protection.
    JEL: H50 C14 D24
    Date: 2015
  17. By: Fernando Ferreira; Joseph Gyourko
    Abstract: Utilizing new panel micro data on the ownership sequences of all types of borrowers from 1997-2012 leads to a reinterpretation of the U.S. foreclosure crisis as more of a prime, rather than a subprime, borrower issue. Moreover, traditional mortgage default factors associated with the economic cycle, such as negative equity, completely account for the foreclosure propensity of prime borrowers relative to all-cash owners, and for three-quarters of the analogous subprime gap. Housing traits, race, initial income, and speculators did not play a meaningful role, and initial leverage only accounts for a small variation in outcomes of prime and subprime borrowers.
    JEL: E0 G0 H0 J0 R0
    Date: 2015–06
  18. By: Jeffrey R. Brown; George G. Pennacchi
    Abstract: We argue that the appropriate discount rate for pension liabilities depends on the objective. In particular, if the objective is to measure pension under- or over- funding, a default-free discount rate should always be used, even if the liabilities are themselves not default-free. If, instead, the objective is to determine the market value of pension benefits, then it is appropriate that discount rates incorporate default risk. We also discuss the choice of a default-free discount rate. Finally, we show how cost-of-living adjustments (COLAs) that are common in public pensions can be accounted for and valued in this framework.
    JEL: G20 H55 J26
    Date: 2015–06

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